And so the latest GDP data is in. While I'm sure there's going to be a great deal written about the new measurements, some of it accompanied by accusations about what the government is really up to, I'm in the camp that says it doesn't really matter that they're now accounting for R&D or movies, so long as historical data remains comparable.
There are several items that stand out from the new GDP release, and the most salient one is that the economy continues to slow. I've been repeating this message for a couple of months now, replete with charts and data, in a losing battle with the talking heads who look at the stock market, then the jobs report, and conclude that the economy must of necessity be "robust."
Also standing out are the revisions, and before we dive in, I think we can all agree on one certainty - the data will be revised again. The estimate for the first quarter of this year has already been on quite a ride, beginning life at 2.4%, then working its way south to 1.8% by last month, and now shriveled all the way to 1.1%.
The size of some of the revisions suggests that more adjustments may be in our future. Nominal GDP for 2010-2012 stayed very close to what it was - I'd been writing that it averaged about 4%, and it still does, being a fraction over now instead of a fraction under.
The gloomier part is that four-quarter nominal GDP has been falling steadily and is now down to 3.1%, according to the official scorekeeper, the Bureau of Economic Analysis (BEA). The agency also gives four-quarter real GDP as only 1.4%. Definitely not robust.
What's more, I'm dubious about the 1.7% print for the second quarter - experience has taught me that whenever the BEA throws up an unlikely creampuff of a number, look first at the price deflator. Sure enough, it took a big dive, falling all the way from 1.7% to 0.7%. Nominal GDP actually declined in the BEA measurements, from a 2.8% rate in the first quarter to 2.4% in the second (not encouraging either). These lowball initial estimates for the deflator rarely stand the test of time, though it can take a year or longer for the extra tenths to be added back in.
Given the momentum of the economy, it's hard for me to see where the semi-mythical increase that is perpetually around the corner is going to come from. Mark Zandi, for whom I usually have a reasonable amount of respect, keeps talking about how 2014 is going to have all of the problems behind it - payroll tax, sequestration, "fiscal headwinds." There is something in this, in that those who are able to get their 2%-3% raise next year won't see it immediately offset by the payroll tax, so the year-on-year comparison will be better. But the payroll tax isn't going away, and one should expect medical deductions to increase.
The spending cuts aren't likely to go away either unless some calamity befalls us that forces Congress to stop posturing for the 2014 elections. It's entirely possible we do get one, but in such a case we're going to be struggling to climb back, not pass where we are now. There is talk of a potential tax cut for corporations, but that's a long way off. Corporations have record profits and profit margins now, yet aren't doing much investing of the cash they have. The first two beneficiaries in line from any tax cuts will be executive compensation first and shareholders second (by random chance, also a benefit for the first).
That's not meant as criticism, but realism. Businesses increase inputs - capital and labor - in response to increases in demand. The reason there are tons of excess reserves in the monetary system is because of a lack of demand, not a lack of cash. I would certainly agree that the US global taxation system needs to be more equable and should be reformed, but I don't translate that into corporations repatriating cash to invest here out of a new-found sense of altruism. They'll do it if it's cheaper to do it here and if the demand justifies it. Otherwise they're just going to bump up buybacks and bonuses again, the way they did for the last tax holiday. They're not philanthropies.
In the meantime, credit continues to contract in Europe and Chinese production is similarly falling (really, I had a hard time believing the figures the BEA gave for second-quarter increases in exports (+5.4%) and imports (+9.5%). There must have been some serious seasonal adjusting going on, given earlier trade reports). Does anyone really take seriously the long string of China's official PMI readings that are always just above 50?
Housing and autos have helped, but don't look for increases in the current growth rate from here. Home prices are no longer cheap, and it doesn't look as if mortgage rates are headed lower next year. The recent back-up has already led to a decline in pending home sales and a continuing sharp drop in mortgage activity, both purchase-related and refinancing. The only way rates can get lower in 2014 is if the economy is flat-lining - which means that the increase in demand hasn't happened.
The increase in auto sales has been a positive contributor, but my analysis of the data suggests that the increased expenditures for autos are being mostly offset in the household budget by cuts elsewhere. Annual growth in total retail sales has been fading.
That leaves employment as the default hope: More people working means more income and spending. According to the BEA's latest data on real disposable personal income (DPI), it grew only 0.7% over the last four quarters (excluding transfer receipts). Wage compensation grew by 2.9% - slightly less than nominal GDP - with the difference between income and real DPI being inflation and the increase in payroll taxes.
The key is the nominal increase. It's still only 2.9%, even with our supposedly robust jobs growth. I have written before that this year's higher estimates of monthly jobs may be an illusion -the BLS payroll data doesn't suggest that hiring is improving, but that the estimation methods changed after the re-benchmarking in the spring. In other words, the raw data is the same as last year, but the initial estimates are higher because of changes in calculation. Supporting this is the fact that BLS data show that the increases in real workers (not adjusted) through the first six months of 2011, 2012 and 2013 have been 0.96%, 0.95% and 0.93% respectively.
Should we stay at the current rate of hiring, there is nothing to suggest the increase in nominal income should go above 3%, leaving an increase in real disposable income of around 1.5% (and perhaps lower, if tensions in the Middle East become critical and drive up the price of oil - it's dicey enough right now. Forget the increase in US oil supply, any disruptions in the Mideast will send prices soaring).
The ADP payroll report is constantly rejiggered to fit official data from the Bureau of Labor Statistics (BLS), so I'm guessing that this week's 200K estimate from ADP is probably close to the BLS number - there was nothing in the claims data to suggest tightening in the labor market. That said, I return to my previous point that the rate of hiring is flat. What's more, ADP's estimate of a loss of 5,000 manufacturing jobs is an ill omen, in my opinion. The sector isn't as big as it was, but it's still a cyclical indicator. The recent data from the BLS has also indicated leakage in manufacturing.
The larger problem is still Europe, which every month looks more and more like the Japan of the lost decades, replete with false starts. The price of central bank action has been the political evasion of problems, as the Bank of International Settlement (the central bank for central banks) noted in its annual report. Even if the US were to increase its stimulus efforts with Keynesian-style spending, as President Obama wants - which I doubt will happen - it's quite likely that the European reaction would be to do nothing but sit even tighter, hoping that America might bail everyone else out.
What does all of this have to do with the stock market? Stock prices have clearly not responded to the slowing economy or slowing corporate profits and revenues (the BEA says adjusted corporate profits fell quarter-on-quarter in the first quarter, and quarter-on-quarter revenues for the second quarter are currently slightly negative for reporting companies). Equities do react to recessions, but not much else about GDP bothers them. It's worth nothing that we are close to stall speed.
I wrote elsewhere last week that the Fed would probably stand pat at this meeting, but over the weekend I began to have my doubts after seeing news that the Treasury is reducing its borrowing. If it follows the current quarter's reduction with a similar one in the fourth quarter, the Fed is going to be buying most of the monthly supply. That's not something the bank either wants or should be doing, except in dire circumstances. For my money, the chances of a September taper - or at least an announcement - have gone up, and I've a feeling the market smells it too.
The worries about September and equities have already begun, and in my experience the more the media frets about September (historically the weakest month of the year) the less likely it is that anything bad will happen. It's quite possible that the market works its way higher by rallying on every little hint that the taper might get postponed. For now, if we do get the usual rallies this week on the first day of the month and the jobs report, that would leave equities short-term overbought and ripe for a garden-variety August pullback, followed by a garden-variety late August rebound. Beware of the Middle East, but for now I still look for an October top.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.